The conquest of inflation is one of the most far-reaching changes of our times. Countries used to think that they simply had to live with and manage escalating prices and wages. When inflationary trends got out of hand, they often had severe political consequences. Unlike unemployment, which affects just the small percentage of people who don’t have jobs, inflation affects everyone. And unlike unemployment, which shrinks what you might earn in the future (if you have a job), inflation shrinks what you have now by eroding the value of your savings. That’s why high inflation has been so often associated with political turmoil, from Germany in the 1920s to Iran in the 1970s to Latin America in the 1980s.
We forget now, but as recently as the 1980s, inflation was rampant across much of the world. Countries such as Brazil, Argentina and Peru had inflation rates that were measured in the thousands of percent. The United States kicked off the decade with over 12 percent inflation. In some European countries, such as Italy, it surged above 20 percent. In most of these countries, the causes were some combination of large government deficits, lax central bank policies and external shocks such as the oil crises of the 1970s.
These crises produced a policy revolution. Central banks became more independent and focused on taming inflation. Governments in the developing world became more fiscally responsible. In some cases — Chile and Mexico — they briefly tied their currencies to the dollar. One crucial reason that countries such as Italy were willing to give up their currency in favor of a common European one was that they believed that essentially merging their monetary policy with Germany’s would enable them to fix their inflation problem.
In large measure, it worked, and by the early 2000s, countries were congratulating themselves for having won the war. It all seemed part of a paradigm in which governments recognized the power of free markets and free trade. Thomas Friedman used the metaphor of the “golden straitjacket” to explain what happened. Governments placed themselves in a situation where their policy options were tightly constrained by markets, and as a result, their politics shrank but their economies grew.
Over the past few years, it has seemed as if the opposite is happening almost everywhere. Look at Turkey, which by the 2000s had become a model developing country, taming inflation and spurring growth. Its policymakers were lauded across the world. Today, Turkey’s president has abandoned even the pretense of rational economic policy, using policy to reward friends and punish foes and advocating monetary policy that is the opposite of what most experts believe would work. Chile, which was considered the most fiscally prudent country in Latin America, now appears to have taken a path toward a more familiar left-wing populism.
Or consider the poster child of developing countries, China, where economic growth was the north star of policymaking. Today, President Xi Jinping pursues policies that often attack the private sector in key growth areas such as technology. As scholar Elizabeth Economy has pointed out, it is China, not the United States, that began the move to decouple the two economies and embraced protectionism and economic nationalism when Xi announced his “Made in China” strategy. India, for its part, has mirrored this with its own protectionism and subsidies.
The Western world has followed suit. Driven by an understandable concern about middle-class wages and inequality, economic policy is no longer oriented toward growth. Tariffs, subsidies and relief packages all reflect the fact that politics has trumped economics. Central banks everywhere have rushed in over the past decade to take extreme measures in response to the two big shocks of the age — the financial crisis and the pandemic. As Ruchir Sharma notes, in the mid-1990s not one country in the world had a ratio of debt to gross domestic product above 300 percent. Today, 25 countries have exceeded this mark.
The old obsession with economics over politics was overdone. It achieved great successes but created other problems, such as wage stagnation. But the current emphasis on politics over economics seems more dangerous. It allows politicians to engage in patronage policies, protectionism and short-term gimmicks to prevent ordinary people from feeling the pain of a crisis. In the long run, however, one wonders if it is these same ordinary people who will have to pay the price.